Taxes on Small Businesses

Derek Thomas Excerpts

Wednesday 18th October 2017 Westminster Hall

[Derek Thomas (St Ives) (Con)]

I beg to move,

That this House has considered the effect of taxes on small businesses.

It is a pleasure to serve under your chairmanship, Ms Dorries. I am grateful for the opportunity to raise this issue, which affects small businesses in west Cornwall and the Isles of Scilly, in the constituency of St Ives.

Some 87% of business enterprises in my west Cornwall constituency are classed as microbusinesses, meaning that they employ fewer than 10 people. In fact, 99% of all businesses in my constituency are small and medium-sized enterprises, employing fewer than 250 workers. Those small, locally run businesses provide the lion’s share of jobs and are the drivers of our local economy. If that is true in St Ives, it will be true elsewhere in the country, which is why understanding how the tax system helps or hinders small business is so important and why I am pleased to raise the issue today. It is also why I have dedicated a considerable amount of time since being elected in 2015 to meeting small businesses and understanding the issues facing them. In fact, I had a small business of my own until my election in 2015.

I know that this Conservative Government recognise the considerable contribution of small businesses, and I acknowledge and appreciate the work that has been done to address the tax burden and support small employers. Many of the 3 million jobs created since 2010 are within small businesses, which is, in part, a credit to Government policy. I recognise that there is no shortage of priorities for the Government and that navigating our way out of the EU will be time-consuming, to say the least. Despite that and—dare I say it—because of it, if there was ever a time to radically address the way businesses are taxed, it is now. While reform will be a challenge, it will undoubtedly yield benefits for our economy by improving productivity, driving wage growth, boosting full-time employment and spreading wealth across all corners of Great Britain, which is a particular concern and interest of people in the far west of Cornwall.

Time does not permit us to consider every aspect of business taxation, and I am not gifted with the brain that is needed fully to understand the complexities of the issue. However, I wish to cover three tax-related issues that stand out to me as clear opportunities for the Government to remove barriers for small business and demonstrate an understanding and recognition of the life of a small business owner.

The first issue is the VAT threshold. Small business owners in coastal communities such as Cornwall and the Isles of Scilly choose to curtail their business to duck under the VAT threshold of £85,000. That is not necessarily about tax avoidance, but more a desire to avoid another level of administration. One business owner on Scilly contacted me because the gallery she runs is set to cross the VAT threshold. She will then have to raise prices by 20% to break even. Since only one of the gallery’s 30 artists is VAT-registered, being able to claim back VAT would not compensate for that change. The gallery must either take the leap and accept that burden or close for the rest of the season.

The effect of the stifling VAT threshold in my constituency is reduced activity during shoulder and winter months, reduced employment opportunities, reduced Government tax income, depressed town centre activity and greater pressure on the hospitality sector during peak season. A guest house owner wanting to avoid registering for VAT may also choose to close early, reducing the availability of beds for visitors and removing altogether the potential spend of the visitor within the wider community.

I raise that issue now because leaving the EU presents an opportunity for the Treasury to consider raising the threshold to, for the sake of argument, £120,000. The Isles of Scilly would be a great place to look at if the Treasury wanted to assess the possible impacts and implications of such a change. The Government may find that it is a cost-neutral proposal.

Another benefit of that proposal is the potential to create greater job opportunities and encourage fresh blood into the tourism sector. That is particularly relevant in Cornwall, Scilly and other rural areas across the UK that struggle to retain young people. I am not suggesting that the proposal would address the skills gap entirely in remote and rural areas, but it would be a step in the right direction.

I assure the Minister and everyone here today that the need to address the VAT threshold in coastal communities is regularly brought to my attention by business owners. I am interested to hear if the Minister is minded to consider such a proposal and possibly a pilot in the constituency of St Ives.

[Jim Shannon (Strangford) (DUP)]

This is a very complex matter. I was doing some research on it and found that 59% of homes now own a tablet, 71% of UK adults have a smartphone and 97% of small and medium-sized businesses have access to online services. I make a plea to the Minister on behalf of craftspeople—people who know nothing about computers but everything about their hands. The person who has a computer in their house is probably a 13-year-old—

[Jim Shannon]

Does the hon. Gentleman agree that that point is not fully taken into consideration when it comes to the digitalisation of everything?

[Derek Thomas]

If the hon. Gentleman is happy to wait, I will be pleased to address that issue later.

I will move on to business rates, which have been quite a contentious and well-documented issue in recent months. There is no doubt in my mind that if the Treasury were inventing a taxation system from scratch today, the current business rate system would not feature in its proposals. The Government should scrap the current system of business rates and develop a fresh solution, injecting fairness into the tax system for small businesses and taking into account the growth of online shopping and supermarket home delivery services.

Structurally, there are many things wrong with business rates. The tax bears little or no relation to the success or activity of a business. The method used to calculate it is arbitrary. Colleagues will be aware that rates are calculated by multiplying the rateable value, based on the assumed rental value of the property, by a multiplier set by Government. Almost in recognition of that, and in an attempt to spare small businesses the business rate burden, the 2010 Conservative-led coalition and the two successive Conservative Governments have sought to address the problems associated with business rates. As a result, some businesses are eligible for rate relief, with many paying no rates at all. Others, for reasons that are beyond the understanding of most lay people, find they are charged 100% business rates, with many in my constituency experiencing considerable increases following the revaluations earlier this year.

The owner of a small independent delicatessen in Helston, where rents are relatively lower, approached me for help in March. Her current rateable value stands at an extortionate £17,750 per year. To rub salt into the wound, her rates are calculated as £149 per square metre, which is the second highest on the street. A chain bakery operating next door pays just £101 per square metre—32% less—and a national clothing chain on the other side of the street pays just £66 per square metre, which is over 56% less. If she enjoyed the same rate per square metre, she would be liable for no rates whatsoever. Because of her business rate charge, she is not sure that she can afford to stay in business.

The current business rate calculations unfairly discriminate even between businesses in the same part of the high street and do not enable businesses to operate on a level playing field. The great tragedy is that that example is not unique. There are similar cases of an independent photography shop in Penzance and a car paint-spraying business that is run by two youngsters who find that their business rate charge bears no comparison to similar units on the same industrial estate. In both instances, there is little hope for the businesses unless the Government act quickly.

Furthermore, in this age of online shopping and supermarket home delivery services, there are businesses essential to the health of the high street that find competing in today’s world nigh on impossible, despite their so-called privileged position on the high street. Historically, a place on the high street gave an advantage to the shop owner, and consequently the business rate levy reflected that. The ability of supermarkets to provide a delivery service direct to the door has undermined that advantage, and in many cases, despite the modern reach of supermarkets as a result of home delivery services, the supermarket pays relatively less in business rates than the high street shopkeeper. In fact, in St Ives, business rates for some supermarkets reduced this April.

To add insult to injury, rents in St Ives town are being pushed up by the perceived popularity of this iconic place. This year, because rate charges relate to rental values, independent business owners have seen their business rate charge rocket. Traditional retailers, such as bakers, butchers and grocers, face the risk of closing after decades of trading. High street chains move in, and ironically the very thing that drives visitors to St Ives is being lost, partly because of what I believe is a flawed business rate system.

Could it be that the cost of running a high street business, including a business rate charge, means that a greengrocer can no longer compete with a supermarket 20 miles away, now that it can deliver groceries to the family living in the flat above? Surely a modern-day business tax should recognise such changes in consumer behaviour. Furthermore, business rate charges take no account of external factors such as high parking charges, poor upkeep of the local area, closure of local public toilets, or a downturn in the economy, most of which have been experienced in Cornwall in recent years.

I have worked hard with a number of business owners who have found the business rate system profoundly challenging. That group includes a local pub owner, who came to the trade recently, full of enthusiasm. The pub employs 14 locals and is a focal point for the community. A rate review means that the pub now faces a 280% increase in business rates, which equates to an extra £13,000 a year. I recognise that the Government have done some work, and Cornwall Council is also doing some work, to help with that, but the fact remains that that rural pub owner’s rates have increased by 280%. As rural pubs close around us and communities are losing their rural services, issues such as this are hardly encouraging to new entrants.

Another major drawback is that business rates hinder aspiration. Should a small business benefiting from full rate relief wish to take on a second property, expanding both the business and the workforce, it will lose its rate relief and pay rates on both the new and the existing outlet. That step change discourages growth and innovation, and stifles all the benefits that growth brings, including job opportunities, staff training and career progression. That is hardly the intention of what I believe is a small business-friendly Conservative Government.

Before moving on, I want to stress the potentially unique role that traditional independent retailers such as bakers, butchers and grocers have in looking out for vulnerable people in the community—for example, the elderly. That is reason indeed to consider the potentially devastating impact of an outdated business rate system.

Finally, I would like to address the Government’s Making Tax Digital plan. I am in favour of moving across to digital tax reporting and I recognise the Government’s ambition to move to a fully digital tax system during the next few years. Will the Minister ensure that SMEs, including sole traders, have easy access to reliable software and training? Have the Government considered that for some businesses, a transition to digital-only tax will present a further serious administrative and financial burden? Strange as it may seem, there are still significant numbers of traders who are not naturally acquainted with online activity. I am reluctant to single out individuals, but I have met a number of sole traders who are not tech savvy, and the idea of making tax digital fills them with dread.

At present, I can see that there may be a benefit to Her Majesty’s Revenue and Customs in making tax digital, and I know that the Government are making allowances for areas of poor digital connectivity and plan to exempt some on very low self-employed incomes. Can the Minister please ensure that those exceptions are properly supported by accurate data, so that those who are not yet in a position to take part in the brave new world of digital tax reporting will not be unfairly penalised or discriminated against?

In conclusion, I believe that the Government could send a clear message that Brexit does not mean that important domestic priorities are being left on the back burner. The Government can do that by ensuring that small business growth is not stifled by out-of-date and grossly unfair tax systems. Taxation must promote growth so that, as a nation and within our communities, we can maximise all the benefits that a vibrant economy brings. As changes in consumer behaviour and better digital services lead consumers to gravitate towards online shopping and supermarket home delivery, we must ensure that the Government have a fair system of taxation and make changes to unlock the potential of our country’s entrepreneurial small businesses.

The Government must recognise that the negative impact of business rates and the profit hit from VAT registration often go hand in hand. Both taxes kick in at the crucial point when an enterprise is on the cusp of growing to a size at which it can be of useful benefit to the local economy and community. Will the Government please consider scrapping business rates once and for all, in favour of a tax that reflects the economic activity of all businesses concerned? Will the Government explore opportunities to raise the VAT threshold in coastal and rural tourist areas, and will the Government continue to listen carefully to those who recognise the move towards digital tax reporting but ask that we approach it with caution and understanding?

[Ms Nadine Dorries (in the Chair)]

I call Jim Shannon.

--- Later in debate ---

[Derek Thomas]

Unquestionably, since 2010 the Government have taken action to support small businesses and stimulate local economic growth. I am glad that the debate has provided an opportunity to remind the House of those measures. I am also glad that we have been able to discuss the introduction of positive employee support, such as the national living wage and auto-enrolment.

We are united in our desire to ensure that Great Britain remains open for business. Our desire is to make Great Britain a great place to run businesses, which is why my plea, on behalf of rural areas that are largely populated by small businesses, is to reform how we tax them. I thank everyone who took part in the debate. I apologise to the shadow Minister for what seemed to be quite an uncomfortable experience for him.

As we have heard, the business rate charge is hurting many independent small businesses. It is time to install some fairness into business taxation. I maintain that a tax system that reflects the activity of the business, rather than the building from which it operates, has to be fairer.

Question put and agreed to.

Resolved,

That this House has considered the effect of taxes on small businesses.